There would appear to be unanimity amongst the informed media that the resignation of Gary Cohn as Trump’s senior economics adviser is bad news.

As it happens, this blog rarely laments the resignation from public office of a person who got the job because they were previously at Goldman Sachs, but there have to be exceptions to rules. This is one such occasion.

Cohn has resigned because he was unable to stop Trump's plan to impose an additional 25% tariff on imports of steel and aluminium into the USA. This is a move targeted on China, which has implications way beyond that, including for the UK and the EU.

As a matter of fact I am not opposed to all tariffs. In fact, in the case of lower income countries I think that tariffs often have a strong and positive role to play in the development of economies, firstly by protecting local business and secondly by providing an easy, cost-effective, and desirable tax base that is charged on the effective rent that they are due for the loss of their natural resources.

That said, the USA is not a low-income country. Nor is it the victim of a trade war: its deficits are all of its own making. And the motivation for this tariff is not economic: it is a deliberate escalation of aggression towards China, in particular, that is entirely dogmatically motivated.

And therein lies the danger. If anyone could believe that this policy was, in any sense justifiable, then maybe ( just, maybe) it could have been imposed without too much world reaction. But, the fact is that everyone reads this as the deliberate opening salvo of a tariff war driven by political intent.

That's the problem. There are occasions when the country caught subsidising its exports except the tariff by shrugging shoulders and saying 'fair cop'. But this is not one of them. China is going to respond to this. So is the EU. It's almost a fact to say that they cannot: their own industries require it.

This is precisely why for years wise people have tried to avoid such wars. There can never be winners, even if Trump thinks that ' beautiful outcomes' are possible. Tariffs are intended to increase separation. Their intention is to provoke. More aggressive environments follow. But so too, necessarily, in situations such as this (but not in the case of low income countries, as I previously described) well-being is reduced because whilst there are, undoubtedly, problems with the Ricardian theory of trade, it is also undoubtedly true that some countries do have a competitive advantage over others in some activities, and it is to the overall benefit of all that they be permitted to exploit that advantage so long as others are able to do so in their own area of advantage as well.

So where are we heading? Trade war: that's where. And like all economic wars (including tax competition) these are proxies for the ultimate in aggression, and can escalate.

So why does Cohn's departure matter? Because he opposed this and now there is no one in the White House to do so.

Things can only get worse.

Worry.

And note: in the midst of all this our neo-Trumpians are doing Brexit. It is no coincidence.

31 Responses

After huge crashes like the Credit Crunch you’d think ‘Things can only get better’.

Not anymore it seems.

I know that the situation needs more analysis than I can possibly provide before I head off to work. But I cannot help thinking that The Left has just been so absent since 2008. In America, a supine Democrat party has just not helped. And the result is this stupid populism in the form of Trump whose administration just goes from meltdown to meltdown.

Maybe it is just a case of this being what the ‘interregnum’ actually looks like?

Isn’t this a move to protect USA industry? Aren’t we likely to have something similar here to protect ours? Are’t the Chinese trying to dump cheap steel and ali everywhere with a view to undercutting and destroying local industries leaving them the monopoly on production, which they can then charge what they like for? Might not be a bad thing if they did, actually, as it could force people to start taking hemp seriously as a steel substitute.

Without agreeing with Trump, I’m not sure the amount of Chinese steel directly imported by the USA is that relevant. We live in a global age. If the Chinese flood the world with artificially cheap steel it reduces prices worldwide, it makes it impossible for American producers to export & it makes it uncompetitive for American manufacturers to use anything BUT imported steel, whether that comes direct from China or via other countries.

This was a problem that needed addressing, but I’m not enthusiastic about Trump’s means of addressing it. At the same time, if I was in Indiana, living on minimum wage, I’d’ve got heartily sick of Obama, & before him Bush, saying “we’re seeking ways to address this with our partners”.
Trump says “F… our partners, we’ll try to sort this unilaterally”.

It’s certainly a serious challenge to dollar hegemony. Other nations will avail themselves of the opportunity to poke the ‘Great Satan’. Fracking in the US means the cosy petrodollar arrangement is seriously compromised. Saudi Aramco will float on the FTSE not on Wall Street. (Not that that is anything to be proud of)

And for all the hype never forget the POTUS is only a mouthpiece, albeit in Trump’s case a maverick. Does he really write his own tweets I wonder ?

He may do, but that’s not the normal way they do things in the US entertainment industry – sitcoms are written by teams.

Who knows what’s in Trumps ‘mind’, but I think a little context is useful – Chinese steel constitutes only 2% of US steel use, despite them (the Chinese) producing 50% of the world’s supply. That low figure followed tariffs added by Barrak Obama in 2016.

Saturday evening – news says (mind you that’s the BBC, so please yourself whether you believe it) Mexico and Canada excepted from tariffs and EU expecting the same deal.

Whoop Whoop! Collateral damage limitation in operation. Only a matter of time before it excepts every nation on earth except China. (Does Iran produce steel ? They won’t be expecting much latitude there.)

“easy, cost-effective, and desirable tax base that is charged on the effective rent that they are due for the loss of their natural resources.”

Is there a typo in there? Isn’t the tariff paid to the importing country, not the exporting country?

So if a developing country charges tariffs on imports (as part of its tax base and to protect domestic industry), aren’t the imported goods using up natural resources of the exporting country (ie another country), not those of the importing country charging the tariff?

This is one (of several or more) issues I find it difficult to get my head round. We are constantly told in media comments that such and such a population is ‘living on ‘two dollars a day’, but they can’t be. That is to say there is no meaningful equivalence because no American could live on such a paltry sum; and if someone elsewhere can live on it it ain’t two dollars it’s a living wage.

Presumably trade tariffs are all about accommodating these currency disparities and in theory would be leveling the playing field rather than constantly striving for unfair advantage.

It’s always the apostles of free markets who cry foul loudest and first. American firms weren’t complaining when they could export their production plants to Asia to
exploit a low wage economy.

I don’t think that’s right, Marco. I think they make pragmatically to a price. If our buyers are looking for cheap tat that’s what they make. So much stuff we have, branded as ‘British’, is reliant on Chinese components and they are as good as the spec, I think you’ll find. Why wouldn’t it be ? Mass manufacture is mostly reliant on machining.

There’s not much western in an iphone except the marketing. and some intellectual ‘property’ of doubtful ownership.

I would imagine, given your convictions, that you have studied de-escalation and de-confliction.

The problem with possessing this knowledge is that you can always see the sources of conflict, even if you are powerless to mitigate or remove them; and you can always see the escalation pathways.

There are some alarming escalations to Trump’s ‘Trade Tariffs’, long before the ultimate escalation to war.

The first is that the EU will respond the way they did to the Bush-era tariffs, by targeted restrictions on exports from electorally-critical States of the USA; this tactic is based on the ‘Chess’ fallacy – the assumption that your opponent is rational, or is always going to defend the interests that ‘ought’ to be important to a rational agenda – and Trump won’t back down the way that Bush did.

So: further Tariffs. An ineffective escalation that leads to retaliation ratger than withdrawal.

If the economic consequences do not provoke the long-awaited revolt of the Republicans – vetoing the President’s exercise of power and possibly even impeaching him – then the EU’s next escalation definitely will: they will target the next round of retaliatory tariffs on Republican Party donors.

This is actually a good thing: de-confliction by neutralising or removing the source of conflict.

Unfortunately, this involves the risks of Trump not only doubling down on tariffs, but throwing an extended tantrum that puts all the powers of the Presidency to destructive use.

It also fails the ‘Chess’ test: what if House Republicans aren’t rational economic actors? I have observed that they tolerate remarkable breaches of propriety in the Executive, even when all rational analysis suggests that there ought to be serious negative consequences.

What if someone, somewhere, sees an upside in the things we see as negative consequences that rational actors would act to avoid?

Hello Vladimir.

Hello, nihilistic Tea-Party populists.

Hello and Heil, you over there under a rock with your ’88’ tattoos

Hello and Hail Gilead, Mr. Vice-President.

Finally, this isn’t about the EU – we’re reacting because there are *some* effects on us – but, really, the worst of it is directed at China.

And China has a variety of unpleasant escalations on offer.

Some of them involve loosening the leash on North Korea.

Some of them are not as controllable as the ruling committee of the Communist Party might think; and the one I’m thinking of involves a threatening ‘rumble’ directed at T-Bills.

Drop a few trillion of them on the market at lunchtime, and watch the Fed – and all the world’s central bankers – run around in circles, frantically burning money in a panic as they try to stop the rumble becoming an avalanche.

I do hope, sincerely, that China has better things to try before they resort to *that* escalation. But they aren’t very good at this, and their first response may be something provocative in the Spratly Islands that offers Trump an immediate escalation path to war.

All in all, I would say that I am beginning to regret that I have learned more than is good for me about de-confliction and de-escalation, almost as much as we are all going to regret that others have larned rather less.